Note: In a judgment dated 7 July 2004,
the Court of Appeal upheld the judgment at first instance on the issue of
contamination but reversed it on the issue of demurrage, holding that in this
case, the sale contract provisions represented an independent code. For a note of
the Court of Appeal's judgment, click here

Summary
When the Devon completed discharge of a cargo of oil at Singapore and
Malaysia 1500mt of oil was found to have been replaced by seawater. The first
issue was whether the defendant Petronas (Petco) had established, on a balance
of probabilities, that the cargo contained more than the permitted proportion of
water when it was received on board from the cargo tanks of the Centaur
by ship-to-ship transfer. The second issue was the nature of Petco's liability
for demurrage under the sale contract, in circumstances where Fal Oil had not
paid demurrage under the relevant charterparty.

DMC Category Rating –Confirmed

Case note contributed by

Ann
Moore, Law Correspondent for Fairplay
International Shipping Weekly and contributor to this website

Facts
This case concerned a claim by the seller (Fal Oil) against the buyer (Petronas)
of a cargo of oil, for the payment of a) the purchase price and b) discharging
port demurrage, due under a c&f sale contract. As regards the purchase
price, the buyer took the position that the cargo was off-specification, in that
its water content was too high. The buyer had taken delivery of the cargo into
its vessel Devon by ship-to-ship ("STS") transfer from the
seller's vessel Centaur off the Yemeni port of Port Sudan. The excessive
water content was confirmed only on arrival of the Devon at her ports of
discharge namely Singapore and Feoto in Malaysia. There was a conflict of expert
evidence as to what methods of measurement were acceptable, and whether the
inspections had been properly conducted. The

evidence pointed to a deliberate substitution of oil for
water at some stage between the original loading of the cargo at Yanbu, Saudi
Arabia and its final discharge. The principal issue in the case was the time at
which this substitution occurred.

A second issue was whether Fal Oil, as shipper of the cargo,
could claim demurrage under the sale contract, in circumstances where no
demurrage was due from Fal Oil under the charterparty. The relevant provision in
the sale contract simply specified that demurrage was to be paid "As per
Charter party per day pro rata" at the rate of US$18,000 per day. Fal Oil
claimed demurrage of just over US$500,000. It said Petco was in breach of
contract, either by failing to discharge the Devon within the permitted
laydays, or by failing to take the necessary steps to avoid delay, and/or
causing the vessel to be prevented from discharging at Singapore/Malaysia
without delay.

Judgment
1. The contamination issueMr Justice Morison said the burden of proof on Petco was to persuade him, on
a balance of probabilities, that when the cargo was pumped into the Devon
it contained more than the permitted proportion of water. If there was no
possibility that the contamination occurred after the ship-to-ship transfer, he
must conclude it occurred before, even if he was unsure about some of the
circumstances. But if it was possible that water was substituted for oil while
on board the Devon he must assess the probabilities of whether this
happened before, or after, the transfer. Alternatively, if he found that either
event was equally probable, then Fal Oil must succeed in its claim.

The evidence was that 1500mt of seawater was substituted for oil
at some stage before or during discharge at Singapore/Feoto. The judge found
that it was not known how this was done, but the oil could not have been
discharged into the sea without serious pollution. He found that the
measurements and sampling at Yanbu, the port of loading, and at the Caltex
terminal in Singapore were reliable, which meant the substitution had occurred
before the Caltex sampling point.

Morison J found the substitution "must have been done
knowingly". The possibility of accidental contamination was excluded by the
evidence, and would not, in any case, account for the missing oil. This meant he
could not rule out the possibility that the substitution occurred aboard the Devon,
but how and when was as much a mystery as with the Centaur. However the
House of Lords had decided in The Popi M that the discharge of a burden
of proof requires more than the Sherlock Holmes principle that if the impossible
is eliminated, "whatever remains, however improbable, must be the
truth".

The judge concluded that there was "probably" a
deliberate switch of seawater for cargo oil, which "probably" occurred
either on the Centaur or the Devon, "before, on or after the
STS" - all possibilities which he could not exclude. This left him in the
unsatisfactory position of being unable to say whether Centaur
"probably" discharged a contaminated cargo into Devon or
whether the contamination "probably" occurred after transfer. He held
that either was possible, but that was not sufficient to discharge the burden of
proof. Petcohad not, therefore, made out its case.

2. The demurrage issueThe judge said no demurrage was due from Fal Oil as shipper under the
charterparty, so the question was whether the Petco was liable under the sale
contract. It was a c & f contract, said Morison J, which did not require
discharge "in any particular time". He therefore held, in accordance
with the authorities (Ets Soules v Intradex [1991] 1 Lloyd's Rep 378; Mallozzi
v Carapelli [1975] 1 Lloyd's Rep 229), and the commercial reality of the
transaction, that the demurrage obligation was "in the nature of an
indemnity rather than an independent obligation".

On that basis, Fal Oil could not claim from Petronas demurrage
that it

had not
itself had to pay to the shipowner.

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